Institutional investors usually buy one of these stocks and sell the other as economic conditions change.

Deere Shares (DE.N) and Caterpillar (CAT.N) — industry leaders known for the large machines they build — have another kind of association. Institutional investors often buy one of these stocks and sell the other depending on the state of the economy.

Currently, Deere shares are the more popular choice. D.A. Davidson's analyst Michael Shlisky recently analyzed regulatory documents tracking institutional investors buying and selling companies they cover. The results clearly show that this kind of hedging transaction still exists.

“Some institutional investors will invest in Deere and Caterpillar at the same time, choosing one to go long and the other short,” analysts wrote in a report on Thursday.

Deere's profits depend on farmers' spending on new equipment, while Caterpillar's profits are more related to overall global construction and mining activities. When investors feel that farmers' conditions will improve, they will buy Deere shares and short Caterpillar shares to hedge the risks associated with overall construction spending.

Currently, institutional investors prefer to hold Deere shares rather than Caterpillar shares because agricultural prices are falling while construction activity is still close to record levels. The price of corn has dropped nearly 25% in the past 12 months. The USDA estimates net farm revenue for 2024 to be around $116 billion, down from $156 billion in 2023. The impact on Deere is clear: the company expects net revenue of around $7 billion for fiscal year 2024, which will end at the fall harvest in the US. In 2023, Deere's net revenue was $10.2 billion.

The total construction expenditure in the US is about 2.1 trillion US dollars per year, higher than the low of 1.5 trillion US dollars caused by the 2020 pandemic. According to FactSet, Caterpillar expects net revenue of approximately $10.5 billion in 2024, up from $10.3 billion in 2023.

Both Deere and Caterpillar are classified as cyclical stocks, which means investors like to buy when things aren't going well and sell when things are the best. As farm incomes improve, things are likely to get better for Deere, and Caterpillar's situation may be the best in the short term. This explains the current position of institutional investors.

“We don't think this kind of trade will reverse to going long on Caterpillar anytime soon,” Shlisky said. Most regular investors won't short sell stocks, but that doesn't prevent them from focusing on Deere shares. Shlisky suggested buying shares in Deere, saying its share price could rise to 465 US dollars, a potential increase of 27% compared to Wednesday's closing price. He rated Caterpillar as owned, and his target price was $337.

This reflects the overall view of Wall Street. Overall, 52% of analysts rated Deere shares as a buy, which is in line with the average rating of 55% of stocks in the S&P 500 index. The average target price for Deere shares is around $425 per share, which is about 16% higher than the recent price.

Roughly 35% of analysts rate Caterpillar stock as a buy. The stock's average target price is around $352, which means a potential increase of around 4%. As of Thursday's trading, Deere shares have risen about 6% over the past 12 months, falling about 19 percentage points behind the S&P 500 index. Caterpillar shares are up about 65% over the same period.